On June 4, 2010, PIA National President Jon Spalding asked publicly about
the oil spill what was being whispered around the industry: "What about claims?"
With the BP oil spill in the Gulf of Mexico ongoing, the southeastern
United States is facing the largest man-made economic and environmental
disaster in our nation's history, Jon pointed out that the insurance industry
needs to prepare now to answer questions from consumers about what's covered
and what's not.
Claims questions are now front-and-center. Claims are coming in from
local, state, and federal governments, as well as all the individuals and
businesses being adversely affected. There are claims for direct damages,
and loss experienced indirectly. And as any PIA members know and understand,
policyholders adversely affected will naturally ask whether the insurance
that they have in force will be a source of timely recovery.
All U.S. Laws Will Apply:
Under intense pressure from President Obama, BP agreed on June 16, 2010 to
set up a $20 billion escrow account to pay claims resulting from the
ongoing oil spill. This fund will be administered by an independent third
party, Kenneth Feinberg, the administration official who oversaw compensation
for executives at companies that received federal bailout funds and who
also oversaw payments to victims of the September 11, 2001 terrorist attacks.
The President made clear that $20 billion would not cap BP's total
liabilities, emphasizing this by declaring that this was a federal disaster
that was man-made by BP.s negligence. A federal commission has been formed
to both determine the scope of legal responsibility BP will be assigned
under federal criminal and civil statutes. When BP advised that it would
pay "all legitimate claims," Congress and The White House made clear
that is a federal determination, not a determination to be made by BP.
By declaring federal domain — the right to define and control this
issue early on — officials were putting everyone on notice that all
applicable federal and state laws would apply, not just the ones that the
negligent parties would like to argue apply.
Scope Of Liability:
At first, BP, Transocean and Halliburton "assumed" that their collective
obligations for economic damage would be capped under the federal Oil
Pollution Act of 1990. This law was enacted after the Exxon Valdez spill;
it limited corporate liability to $75 million for economic damages
resulting from an oil spill.
Transocean petitioned the federal district court in Houston to limit its
liability in the lawsuits and claims filed against it to about $27 million.
Spurred by its insurers, Transocean made this argument under the Limitation
of Liability Act, an international maritime law that allows a vessel owner
to limit liability to the value of the vessel and its freight. The law
dates back to the mid-1800s, when it was passed to protect U.S. vessel
owners, eliminating some risk in crisis situations in order to give aid to
U.S. fleets in competing with foreign ships in international waters.
Now, The White House and Congress have made clear that previous limitations
on liability will not apply in this case.
The liability situation is further complicated by the fact that the some
of the parties (and/or a significant portion of their insurance) are not
really United States firms. All together, this sets the stage complicated
and protracted court battles.
The actions by the federal government assert that this is a United States
event and will be dealt with fully under U.S. law. The federal government
is holding BP directly responsible for all claims and losses, but has not
restricted BP.s rights to pursue other parties who may be at fault.
Insurance Claims Questions Arise:
While the setting up of the $20 billion fund to pay claims will remove
some of the pressure on the insurance industry, consumers will still have
one basic question: "Am I covered?"
So far, we've seen this question come up regarding the National Flood
Insurance Program (NFIP), specifically regarding what would happen if
a hurricane in the Gulf pushed oil-soaked water onshore.
In the end, an official memorandum
addressing NFIP coverage was
issued by Jim Sadler, head of claims adjusting for FEMA/NFIP. The
statement confirmed an earlier statement from Mississippi Insurance
Commissioner Mike Chaney that there needs to be a declaration of flooding
conditions and then residents needed to prove a flood occurred under
standard flood policy definitions to obtain coverage for hurricane-driven
oil damage to the building structure insured through the NFIP.
Meanwhile in Louisiana, oyster harvesters were advised by the U.S.
Department of Agriculture's Risk Management Agency that federal crop
insurance won't cover oil damage. This year, about 50 percent of
Louisiana's oyster crop is expected to fall under the Agriculture
Department's group risk plan developed in 2009 by the Louisiana Oyster
Task Force. Growers pay premiums based on how many pounds of oysters
they haul in from oyster beds leased from the state and gain crop
protection from hurricane, drought, and flood damage — everything
except crude oil. As a result the policy, designed to cover natural
disasters, will not cover damage caused by millions of gallons of oil
and chemical dispersant stemming from the site of the Deepwater Horizon
So the federal government made clear that their insurance coverages
are at best limited in scope, if they apply, and don't necessarily cover
all losses suffered from this event.
But consumers need assurance that their claims will be covered, and to
them insurance is the most "known" vehicle for that purpose.
On June 3, 2010, the Insurance Information Institute, an insurance
industry group, published a presentation
by its president Dr. Robert P. Hartwig. He reviews the insurance issues
relating to the Deepwater Horizon oil rig loss, including the types of
coverage that might apply and the number of parties that might be involved.
The liability factor and legal ramifications are discussed. Dr. Hartwig,
too, observes that "A lot of activity is expected around business
interruption, but under business insurance policies the suspension of the
insured's business operations must be caused by direct physical loss or damage."
A recent news report makes clear the traditional travel insurance does not
cover a vacationer.s loss because of a man-made pollution event that is
not the fault of the ship line. And in contrast to what the Mississippi
Commissioner advised, Dr. Carol Jordan, a leading scholar of risk
management and insurance at Troy University, advised
that traditional insurance policies for dwellings, homeowners,
condominiums, and mobile homes all "specifically exclude the cleanup
of pollution," and that homeowners affected by the BP oil spill may be
left with few options but to seek eligibility for a Superfund cleanup or
pursue BP with claims.
Also, as the federal government begins to take more direct control of the containment/clean-up efforts, firms and person potentially being hired by the federal government find that they must comply with federal insurance requirements that may not be easily available in the private sector.
What It Means to Consumers, Agents & Insurers:
To the general consumer under this stress, all these experts' comments
are confusing. They have specific claims
questions. This is materially
different than asking general questions about what a policy covers or excludes.
When insurance customers have needs and questions, they come to their agents
for answers, and agents must respond.
PIA members know that their primary reference sources for questions about
insurance claims and coverage assessments are defined by the specific
policy language in question, along with the past claims practices of the
insurer. Secondary sources for information regarding claims include FC&S,
PF&M, CPCU, ISO, AAIS and NCCI — but in the end, whether a particular
insurance policy will or will not respond, and if so how, is the sole
responsibility of the insurer
PIA appreciates the delicate situation in which we all, insurance
producers and carriers, find ourselves. PIA members know there is a
critical difference between discussing the nature of insured risk that
the consumer has purchased under their policy vs. the specific
circumstances of the claim they're making and the claims settlement
decision to be made.
That said, their questions need to be answered and PIA member need
reliable guidance from each of their carriers. This is not a time when
carriers can sit back silently
PIA has begun an outreach to carriers and insurance forms organizations,
urging them to activate their guidance to their insurance producers.
This should specifically include informing PIA agencies where to seek
proper response to and for their customers. claims questions, and where
to direct their claim filings. This is part of a PIA Action Plan on
this issue, which includes sharing some of the intital claims questions
the industry must be prepared to address.
PIA Action Plan:
This report is an additional follow up to the outreach PIA has already
begun with carriers and insurance forms organizations, urging them to
activate their instructions to their insurance producers. This
should specifically include informing PIA agencies where to direct
their customers for their claims questions.
I.||PIA National is sharing a developing series of real claims and
coverage questions (see above) with ISO, AAIS, NCCI and PIA partner carriers
to engender industry discussion in order for carriers to issue reliable
guidance memos to their individual producer forces.
II.||PIA National also encourages PIA members to contact every
one of their insurers (in writing) and request their written guidance.
We've included a suggested format
that members may use to guide their own individual written communiqués.
III.||PIA asks all insurers and PIA members to please share with
us the guidance information that you make available or receive. PIA will
work with insurers to help facilitate the flow information between insurers
and their insurance producers to answer claims questions from insureds.
A special section on our website at
is devoted to this.
IV.||PIA will continue to work with federal and government
officials to assure that PIA members receive authoritative federal
agency memorandum as to any claims-related questions that may arise.
Federal insurance programs may still be subject to political pressure
as to their coverage, before, during or even after formal claims
decisions have been rendered. So, just as PIA members need their
carriers to guide them based on that carrier.s written word on their
stationary, we need written correspondence from federal insurance programs.
V.||PIA is also working with the appropriate federal officials
to encourage the use of FEMA disaster grants and payments systems,
expedited as we did during Katrina, to provide another source of
immediate partial claims payments to citizens. The federal government
would recoup these funds as an additional aggregated claim against BP.
Losses either as a direct or indirect result of BP's Deepwater Horizon
oil spill are man¬made pollution losses, not losses from natural
disasters to which insurance generally responds. The federal government
is holding BP primarily responsible for all the claims arising from
this man-made pollution event. Ultimately, what's covered and what
is not covered under private sector insurance will be determined by
each carrier.s individual decision on each claim.
All of us in the business — producers, insurers and regulators
— need to be working together to provide the more accurate,
reliable, and timely guidance that insurance customers require and
need. PIA National is committed to fulfilling its part in this process
and looks forward to working with you.
Your input is needed
: The members of the PIA National
Business Issues Committee (BIC) welcome your questions, comments
and information. We've created a resource area for PIA members at
where much of this information will be posted. Please direct your
input to email@example.com
they will be shared with the BIC Technical Working Group.